A Battle for Cyberspace

The trade war between the United State and China rages on. Headlines have mainly been focused on the economic impact of the on-going trade negation between our two respective countries but realistically the trade war is just a side show distracting the public from the beginning of a technology war — a fight for cyber dominance. The trade war is really America’s formal acknowledgement of the inevitable collision course between American and Chinese interest regarding cyberspace and ultimately who calls the shots moving forward.

We did not arrive at this point in history by accident, China has experienced unprecedented economic growth since opening up to the west and joining the World Trade Organization in 2001. During this period of hyper growth, wealth has been created, poverty has been lifted, and innovation has flourished. However, despite the positive progression China has made, it is clear that China’s ambitions are an existential threat to American interests and Western ideals. Let’s examine China’s vision for the future, its road map to get there, and the stakeholders at play.

China’s Strategy: Dominate 5G, IoT & AI

The battle for cyber dominance calls for control of the infrastructure, IP, and supply chain of forward-looking technologies. We have arrived at this point thanks to previous cycles of infrastructure being laid and applications being built on top; the next phase of each cycle relies on the innovations from the previous cycle. What it all comes down to is data. Each new cycle brings forth new forms of data generation and collection. The data generated, collected, analyzed, and applied over the past cycle of innovation has brought us to the point where a new layer of infrastructure is required if we wish to build out the technologies of the next phase of innovation. Machine learning applied through artificial intelligence and the Internet of Things (IoT), among other technologies, will be the focus of the decades to come. The infrastructure required to effectively build and deploy these innovations is 5G.

The ‘tough’ conversations between the United States and China are about how to handle the infrastructure, IP, and supply chain of the technologies previously mentioned. The United States currently dominates the infrastructure, IP, and supply chain of present enterprise high technologies, despite China being the world’s leading manufacturer. China views this dynamic as an opportunity to ‘change lanes’ and overtake the west in the infrastructure and technologies of tomorrow. This ambition is geared toward achieving technological self-sufficiency by 2025. Meaning total control of sourcing raw materials, manufacturing, IP licensing, and network distribution.

China’s dominance in 5G technology, hardware, and data standards should be alarming, for it threatens the security and sovereignty of the companies/nations that build on top of them — this is why Huawei has been under scrutiny during the on-going trade negotiations between the United States and China. As the world begins to shift towards 5G, greater quantities of valuable data will run through 5G networks. Chinese 5G hardware could provide a backdoor for China to access and manipulate these networks. Not to mention the required 5G network maintenance and software updates that could potentially be beholden to Chinese vendors due to concessionary agreements made in order to access Huawei’s low-cost equipment (made possible by state subsidy and industrial espionage.)

In addition to a head start in 5G technology, China has also lead the IoT industry possessing most of the world’s IoT supply chain from chips, software, devices, and operators. Telecom giants like ZTE and Huawei assemble the equipment systems, while state-owned firms like China Telecom and China Unicom act as operators. This early lead has China’s IoT market valued at over $150 billion, with projections of being worth over $200 billion by 2020.

China is also pushing the pace of AI by pouring billions of dollars into domestic and international AI development. China’s allocation to AI has been directed through state owned investment vehicles like Shenzhen’s $30 billion state backed VC fund, the city of Tianjin’s $16 billion AI fund, and Beijing’s $2 billion commitment to AI research. This is on-top of China’s $1.3 billion investment into American AI companies. With significant capital allocations to the space, China is striving to be the center of AI innovation by 2030.

Made in China 2025

The “Made in China 2025” initiative was released in 2015 as part of the CCP’s 10-year economic plan. The goals outlined call for the development of ten domestic technology manufacturing industries:

1. Advanced information technology

2. Robotics and automated machine tools

3. Aircraft and aircraft components

4. Maritime vessels and marine engineering equipment

5. Advanced rail equipment

6. New energy vehicles

7. Electrical generation and transmission equipment

8. Agricultural machinery and equipment

9. New materials

10. Pharmaceuticals and advanced medical devices.

The Chinese are modeling the MIC 2025 initiative after Germany’s ‘Industry 4.0’ — the idea that manufacturing can evolve with the integration of the tools of information technology to the production process. Xi Jinping has made it clear that in order for China to move from a big country to a powerful one, it must strive to be a robust and innovative industrial country, all starting with China’s manufacturing industry.

Forced Technology Transfer: Acquiring Firms

In order for China to overtake its American competitors it needs access and ownership of critical technologies and trade secrets. Rather than spending time and resources on developing these technologies China is having it legally handed over via acquisition of Western high technology firms. China’s state-led economic system is exploiting the openness of free market economies in North America and Europe by executing a joint effort between Chinese private investors and the state. Highly opaque investor networks powered by government capital, are facilitating acquisitions of foreign technology firms in order to obtain their innovations and intellectual property. This legal form of intellectual property theft is happening at an alarming rate, and the history of investment activity over the past couple years coming out of Chinese firms align with the plans laid out in the MIC 2025 plan.

According to Taiwan-based Chung-Hua Institution for Economic Research the top two industries that Chinese firms allocated towards are manufacturing ($30 billion), and information technology/software ($26.4 billion). Chinese national investment funds are raising and investing capital into similar sectors. For example, China Integrated Circuit Industry Investment Fund, has raised $19 billion thus far with a target of $95 billion, all to be deployed in chip design and manufacturing investments.

Through proxies like the Shanghai Electric Company, China has made numerous investments in foreign companies that specialize in (digitalization) and automation of industrial production. These investments have been concentrated mainly in German firms like Manz, a manufacturer that specializes in electronic parts, solar modules, and lithium-ion batteries. Shortly after Shanghai Electric acquired Broetje Automation a machine manufacturer for the aviation and aerospace industry.

The inter-governmental Committee on Foreign Investments in the United States (CFIUS), has successfully prevented several similar Chinese acquisitions of American companies, citing national security concerns. Chinese backed Private Equity Firm Canyon Bridge was blocked by the CFIUS when attempting to buy Lattice Semiconductor, an American chipmaker. However, some business deals have gone through, like Beijing-based Naura Microelectronics Equipment Co. successfully purchasing Akrion Systems, an American company that manufactures equipment utilized in producing semiconductors. Or Beijing municipal authority agency, Beijing E-Town acquiring iML, a firm that specializes in LED lighting and the technology used for flat-screen displays- key technology in developing computer and mobile chips.

Forced Technology Transfer: Access to markets

Another form of forced tech transfer is through concessions in exchange for access to the Chinese consumer market. China’s consumer market is enormous and only projected to grow, whoever has access to the Chinese market will profits like never seen before. Who wouldn’t want a slice of that pie? However, in exchange for accessing these markets Western firms who wish to operate in China are forced to transfer their tech knowledge to their Chinese counterparts via joint-ventures.

China’s Vulnerabilities Exposed: ZTE & Huawei

In order for China to manifest its vision of ruling cyberspace it must find a way to end its reliance on foreign technology companies for critical components. Some of these components include network equipment, microchips, and processing patents among other vital technologies. Since the beginning of the present trade dispute between the United State and China, President Xi Jinping has it made clear that self-reliance and the ability to develop vital technologies domestically are of the highest priorities for China.

ZTE

ZTE is a leading Chinese multinational telecommunications equipment and systems manufacturer. The smartphone manufacturer was hit hard in 2018, when the U.S. Department of Commerce banned all American companies from selling components to ZTE. This ban was in response to ZTE illegally selling U.S. goods to Iran. The ban has since been lifted, but only after ZTE agreed to replace those responsible for covering up its sales to Iran and paying an immediate $400 million in cash of a $1.2 billion fine. With a stroke of a pen, the United States was able to cease the operations of one the world’s largest companies eliminating nearly 75,000 jobs. China is well aware of the vulnerabilities exposed by this ban, which is why China is investing $150 billion into its own microchip industry for immediate expansion. The ban has since been lifted and fines have been paid, but the message has been made clear that the United States is serious about addressing China’s illegal behavior.

Huawei

Another Chinese enterprise that has been severely affected by the present trade dispute is Huawei. Huawei is a multinational behemoth that provides telecommunications equipment and sells consumer electronics. Last year Huawei revenues reached just over $100 billion, up 19.5% from the year before. This growth is fueled by consumer products (i.e. smartphones). Huawei’s booming smartphone business and 5G capabilities have been hit hard by recent developments of the trade dispute between the United States and China. Chip maker ARM has ordered it staff to terminate “all active contracts, support entitlements, and any pending engagements” with Huawei. Android Authority could not of have said it better: “ARM is the lifeblood of the smartphone market, as it’s responsible for the inner workings of the vast majority of smartphones. The company’s architecture and instruction sets are licensed by literally everyone in the smartphone industry. The way a smartphone thinks and processes things? That’s ARM technology right there… Huawei has seemingly lost the very technology it requires to actually make a modern smartphone.” This is a devastating blow to Huawei’s smartphone business — without access to x86 and/or ARM architectures, Huawei engineers will now have to go back to the drawing board and reinvent the hardware and software for a smartphone built from the ground up — which more than likely will take years. Shortly after Google, Microsoft, Intel and Panasonic all severed future business ties with Huawei. The question is can Huawei buy time? Is Huawei capable of finding a way to replace and implement these vital technologies? If so, would it be in line with MIC 2025? In the meantime, Huawei phones are being traded at large discounts.

As I said before, this all comes down to data. The struggle is over who will be the ultimate gatekeeper of how data is generated, collected, and transmitted. China’s ambitions are to dethrone the United States as the leading world super power through winning the development race of the technologies that will power tomorrow. This race is not just about who can out produce the other, if that were the case China has already won, but rather who can outsmart the other. The battle over who can outsmart who will come down to who possesses the superior form of AI.

We have created a beast, that beast being AI. If we wish to grow the beast we have to feed the beast. What does the beast consume? Data. Therefor, who ever generates, collects, and applies the most complete data set will have the superior form of AI. Whoever controls the infrastructure, IP, and supply chain of the technologies that play a role in generating and collecting data will have the upper hand.